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A History of Polyvalent Structural Parameters: the Case of Instrument Variable Estimators

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  • Duo Qin

    (Department of Economics, SOAS University of London, UK)

  • Yanqun Zhang

    (IQTE,Chinese Academhy of Social Sciences, China)

Abstract

This paper investigates the rise and fall of the IV method in macro-econometric models and its subsequent revival in micro-econometric models. The key findings are: (i) the IV method implicitly breaks the contemporaneously circular causality postulated in a simultaneousequation model (SEM) by redefining the conditional variable concerned as a suboptimal conditional expectation of it; (ii) the IV method falls out of favour in macro-econometrics mainly because of lack of empirical validations for such redefinitions; (iii) the IV method wins its popularity in micro-econometrics by its capacity to produce multiple suboptimal conditional bexpectations of the latent conditional variables of interest under the disguise of an SEM consistent estimator; nevertheless, (iv) such suboptimal conditional expectations give rise to the insurmountable difficulty of credibly interpreting the IV-based parameter estimates, especially in the case of prognosticated omitted variable bias. The findings highlight the methodological drawback of the estimator-centric strategy of textbook econometrics.

Suggested Citation

  • Duo Qin & Yanqun Zhang, 2013. "A History of Polyvalent Structural Parameters: the Case of Instrument Variable Estimators," Working Papers 183, Department of Economics, SOAS University of London, UK.
  • Handle: RePEc:soa:wpaper:183
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    More about this item

    Keywords

    Instrumental variables; simultaneity; omitted variable bias; collinearity;
    All these keywords.

    JEL classification:

    • B23 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Econometrics; Quantitative and Mathematical Studies
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General

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